As far as the IRS is concerned, not all tax scams should be treated equally. Last month the Service announced which scams made the list comprising the IRS’s “Dirty Dozen” for tax season 2022, meriting extra scrutiny.
Included on the list is a wide range of tax evasion tactics. This article highlights four of them, namely syndicated conservation easements, micro-captives, return nonfiling, and secreting assets.
Syndicated Conservation Easements
Conservation easements consist of a grant of an easement by a landowner to a qualified organization, typically a non-profit, in which the donor and recipient agree to permanently restrict the development and use of the donated land for the purpose of achieving conservation objectives. To incentivize the conservation of natural resources of historical significance the IRC permits taxpayers who donate land to take a tax deduction in the amount of the value of the land given.
In an abusive conservation easement, a taxpayer attempts to game the system by donating property using inflated appraisals of undeveloped land to take unwarranted tax deductions. The IRS takes strong enforcement actions against these types of transactions.
In the past five years, the Service has investigated hundreds of conservation easements and uncovered tens of billions of dollars of improper deductions. In addition, the IRS audits all conservation easement arrangements.
Abusive Micro-captive Arrangements
Captive insurance is a form of self-insurance in which a taxpayer creates an insurance company to provide coverage in exchange for a tax-deductible premium. In abusive “micro-captive” structures, promoters, accountants or wealth planners persuade owners of closely held entities to participate in arrangements in which the “premiums” are often excessive and used to skirt tax law.
In its efforts to rout out abusive arrangements, the IRS has conducted thousands of examinations of tax returns involving micro-captives, assessed hundreds of millions of dollars in additional taxes and penalties, and launched a settlement initiative. Nearly 80 percent of taxpayers receiving a settlement offer has accepted it.
High Income Non-filers
Consistent with its mission, the IRS remains focused on high-income taxpayers who fail to file returns. While the IRS has always considered high-income non-filers a priority, in recent years the Service has redirected a considerable number of resources, especially from the agency’s collection function, to address the problem more aggressively.
Taxpayers attempting to evade taxes by simply not filing a return will encounter an agency more equipped than ever to track down nonfilers with the Service’s enhanced capabilities in the areas of data analytics and document matching.
Concealing Assets in Offshore Accounts and Improper Reporting of Digital Assets
The IRS has discovered that an alarming number of people have been attempting to evade taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then accessing the funds using debit cards, credit cards, wire transfers or through other mechanisms. Some individuals have even gone as far as using foreign trusts, employee-leasing schemes or structured transactions to prevent the government from finding out about some of the accounts they have. Digital assets have been gaining in popularity in part due to the mistaken belief that they are undetectable by tax authorities.
U.S. taxpayers are taxed on their worldwide income. As such, they are required to report income from offshore accounts and other foreign holdings.The fact that money is held in an offshore account does not mean income derived from it is exempt from U.S. income taxation.
The IRS has at its disposal a variety of tools it can use to identify and track seemingly anonymous transactions of international accounts or digital asset holdings.
The IRS warns taxpayers to be wary of promoters, accountants, or wealth planners who promise to lower their tax bill by employing any of the aforementioned strategies.
IRS Office of Chief Counsel announced earlier this year that the Service will hire up to 200 additional attorneys to aid the government in routing out improper syndicated conservation easements, abusive micro-captive transactions and other evasive schemes.